• Potential bond priced at an attractive 6.875 - 7.875% Bloomberg reported that VimpelCom (VIP) would issue up to USD1.2 billion in four and seven-year bonds through GTH Finance B.V., a fully-owned SPV recently established for GTH’s potential bond issuances. According to Bloomberg, the company will have the option to redeem the bonds at par three months prior to maturity. The four-year bond benchmark pricing will be 6.875% p.a., while the seven-year bond carries an interest rate of 7.875% p.a. It is worth noting that Moody’s recently assigned a (P)B1 rating for the issuance with a stable outlook, and Fitch proposed a BB+(EXP) rating, saying it will be guaranteed by parent VIP. Citi Bank is the coordinating bookrunner, while Barclays and ING are joint bookrunners.
• Interest savings will lead to profitability, reduce governance concern This is an encouraging development for GTH, in our view, as the potential bond pricing represents a refinancing of the existing shareholder loan at a significantly lower rate. VIP’s loan was priced originally at a fixed 12.5% p.a. that was reduced recently to 11.5% p.a. Even if we assume the majority of the refinancing would be covered by the longer-tenor and more expensive tranche (seven-year, 7.875% p.a.), this is still a better-than-expected rate reduction, as we assumed conservatively in our model that the interest rate would only drop to 10% p.a. starting 2017. Reducing the rate in our model to 7.875% would lead to a USD36 million saving on interest in 2016 and USD26 million in 2017, which would directly lead to a return to profitability starting 2016. Equally important is that this shows that VIP is addressing minority shareholders’ concerns on GTH’s governance by VIP, which we view as an important overhang on the stock. We reiterate our Buy rating on GTH and highlight it as one of our tactical picks for 1Q2016 (read full report) which has returned +25% on our call to date.

Omar Maher
Karim Riad